What do you see here at the Tory conference? It's a party that should be wide open to a walloping by a Labour party in a better state. If ever there was need for Labour and its belief in strong government, it's now, at a time of massive market failure, when the Conservatives' remedies are frankly frightening.

Even big banks are shaking to their foundations as their shares fall fast. Private equity companies, the buccaneers created out of billowing debt, are now in peril, unable to pay interest charges: they employ one in 10 in the private sector. The housing market on which the whole tottering edifice depends has been flung into the deep freeze. August figures yesterday showed mortgage lending at just 5% of July's, with house prices predicted to drop 25%. Whatever should have been done to gently deflate prices years ago, a housing crash would be a calamity for too many now.

Labour firefights as governments must, though it uses no political language that might explain why the state needs to nationalise banks. Brown and Darling say little about the cause of this market collapse, or those responsible for it. They stay anxious not to offend the City, despite popular calls for heads on sticks - or at least prompt confiscation of the bonuses of those responsible. (Even the Tory faithful cheered loudest at George Osborne's vague reference to making those responsible pay).

After desperately trying everything else over Northern Rock, Labour now acts fast and deftly on HBOS, Bradford & Bingley and any other fallers to come. But Osborne yesterday took the backwoods Republican view: leave it to the market, let banks crash. He ignores the Lehman experiment: letting it crash caused a domino effect on other banks that frightened even George Bush into government rescue. It takes ideological conviction of some ferocity for Osborne and Cameron to stand out against state intervention when even Bush concedes there is no alternative. That should be a warning that Cameron's Conservatives are rather more ideological and less pragmatic than they pretend.

This week Cameron's party does all it can to hide its Flaming Ferraris and behave like undertakers. But funded by short-sellers' profits, the culture of the City courses through the party's blood. A Labour party that had itself courted the City less assiduously would have had no trouble making mincemeat of them in a crisis like this.

Osborne laid out as rightwing a programme in response to the crisis as you would find in a classic textbook on what-not-to-do in a 1929-style crash. The prospect of a Conservative government looked considerably grimmer by the time he finished speaking. What would he do as unemployment rises, repossessions bite and anxiety grips? Cut government borrowing, squeeze government centrally and cut council spending. Though he says paying back borrowing and later tax cuts are not until the economy stabilises, his eye-catching promise to freeze council tax immediately would come at a heavy price. Average wages rise by 4.5%, inflation is higher and pay accounts for 80% of council spending. That means job cuts and cuts in services at a time when the number of children and the number of old people is rising. Pressure on council services grows annually, needing more, not less, money just to stand still. Although most councils are Conservative, few will relish savaging their own services.

With the same handbag economics Thatcher used to such effect, Osborne makes it sound like common sense to cut back state spending and borrowing when tax and City receipts fall. He cleverly blurs the key difference between government borrowing and the crazy borrowing and lending in the City that caused this disaster: as the Institute for Fiscal Studies points out, there is little change in the proportion of government borrowing now from the debt Labour inherited in 1997. Osborne's tone smacks of 1981, when Thatcher cut into a recession, turning a downturn into a social calamity. But the world has changed in the past two weeks - and in these policies the Tories risk stranding themselves to the right of Bush. Never mind Cameron's compassion, follow the money.

However, Osborne's speech will strike gold with many voters: council tax is toxically unpopular. Tory policy may be dangerously wrong, but his bazookas aimed straight at Gordon Brown found their mark, disabling what should be a robust Labour response. What a flank Brown exposed when he declared this is now "the end of the age of irresponsibility". How easy he makes it to mock Labour for its years of bedazzlement with big money, for courting casino capitalism, for only daring to tax non-doms after the Tories led the way, for only banning short-selling after Bush did it first. True, there was silence from the Tories in those let-rip years, as they opposed all regulation. True, even yesterday Alan Duncan, the shadow business secretary, was still castigating "bossy rule-making" and "regulatory creep" as if nothing had just happened. But the truth is, Gordon Brown's fox was well-shot, his goose well-cooked. What can Labour say?

That's the trouble. That's why The Tories will do well this week, despite bad economic policies. Labour is too hamstrung, gagged and silenced by the past decade when it refused even to whisper a word of criticism about bonus-or-bust bankers taking wild risks. There were plenty of wise voices warning it would end in tears: try the works of Will Hutton and Larry Elliott, which Brown so studiously eschewed.

The result is that Labour now manages the crisis competently, but without a political narrative to draw the voters alongside. Alistair Darling sounds sane and calm - but with no story that describes how the power of good government protects each person or the whole economy in time of need.

Where is Labour's promise to bail out the repossessed as certainly as it bails out banks? Everyone in danger of losing their home should get a cast-iron guarantee that they can sell to the council, in all or part ownership, to keep the roof over their head. It is for Labour to divert money to save all families as well as banks - and shore up the failing housing market at the same time. Let Tories offer bad tax cuts at the wrong time: let Labour find the words to praise the power of good government to rescue people when they need it.